Wednesday, 13 February 2013

Monetary Stimulus of Bank Balance Sheets

Professor John Kay writes today about money printing by central banks under the heading For a stimulus, boring is best (my bold),

There are many ways central banks can give money away without hiring a helicopter. They can buy assets – houses, for example – for more than they are worth, and allow the occupants to live there for a small sum. They can lend against old gold and silver without troubling much to assess the value of the collateral. They can accept IOUs they do not expect issuers can fulfil. They can give creditors implicit or explicit guarantees their future claims will be met even if the borrower fails.
Since 2008 central banks have done these things on a massive scale. They have purchased long-term debt at prices not seen for a generation, and not likely to be seen again; they have refinanced poorly secured private loans; they have purchased obligations of, and underwritten liabilities of, financial institutions and governments of doubtful solvency. All these transactions represent unrecognised public liabilities of uncertain amount and indefinite derivation.
The helicopter has landed: yet the public at large feels little benefit, sees little stimulus. The reason is that the objective of monetisation has not been to put money in the hands of consumers and businesses but to put money in the vaults of banks. To be fair, the central bankers who disbursed it hoped some might work through to the real economy. But their primary objectives were to underwrite the past losses of the banking system and allow the strengthening of bank balance sheets. 
View these charts on U.S. banks that demonstrate what he is talking about.

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